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Oils – excess profit tax rate might stand at 60%, Minenergo suggests

Kommersant reports today that Russia’s Ministry of Energy has suggested two approaches to the excess profit tax for the sector (the mechanism that will be tested on selected greenfields). These are: i) an excess profit tax (EPT) with oil operating income (which is to have the potential to be reduced by capex) being subject to the tax, or ii) a tax on financial results (TFR), with oil revenues decreased by an ‘uplift’ (current opex, DD&A, prior year losses and a capex rebate for the previous four years), which cannot exceed 10% of revenues. The rate for both taxes is suggested by Minenergo at 60%. Export duties are to remain at the currently suggested amount (to decline to 30% by 2017). The Ministry believes that while the TFR can be used only in the test regime for the selected projects, EPT can be effectively translated to the entire industry. The Ministry of Finance disagrees with the suggestions.

In substance, Minenergo suggests the replacement of MET with the EPT given that no changes to export duty implementation are considered. It is difficult to estimate the effect of the potential change on the tax regime for the industry (and some particular projects and companies), but our rough calculation on the base of 2014 numbers suggests that in the case of EPT, the tax rate for some average brownfields is to be very similar to the current MET rate, some USD 23.8/bbl. There is a separate question on how the budget is to compensate for the shortfall in income, as the MET is expected to increase to some USD 40/bbl (as per the tax manoeuvre), while EPT depends primarily on oil price dynamics. In the second case, with the tax on financial results, our simplistic calculation suggests that it might be even higher than the current MET (some USD 26/bbl) given that uplift is limited to 10% of oil revenues.

We believe that it is a long way ahead before any drastic changes to industry oil taxation take place. We are still waiting for the tax manoeuvre (the issue that has been discussed by the ministries and the sector since the beginning of the year) to be approved and the final numbers to be announced. We therefore do not expect any stock reaction to the news.

Dmitry Loukashov, Ekaterina Rodina, Alexander Donskoy, Kirill Sharikhin
VTB Capital analyst


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